TMI Blog1980 (7) TMI 273X X X X Extracts X X X X X X X X Extracts X X X X ..... duction of the interest credited to the respective joint family accounts was disallowed but interest credited to the individual accounts of the three partners was allowed as a permissible deduction in the course of the original assessments. The ITO then came across the decision of the Income-tax Appellate Tribunal, Bombay Bench, in the case of another assessee wherein it was held that so long as interest was paid to a partner, whatever may be the capacity in which he receives the payment, whether as a partner representing the HUF or in his personal capacity, the claim for deduction would be inadmissible under section 40(b). The ITO, in the light of the aforesaid exposition of law, was of the view that the interest credited to the individual accounts of the three partners could not have been allowed as a permissible deduction and he, therefore, issued a notice under section 148 in respect of each year of assessment and called upon the assessee to show cause why the assessments should not be reopened with a view to adding back the amount of interest which was wrongly allowed as deduction. Ultimately, the assessments were reopened under section 147(b) and the income of each assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e original assessments inasmuch as interest paid to the partners in their individual accounts was not disallowed by the ITO, although, having regard to the true interpretation of section 40(b), the deduction was not permissible ; (iii) that the information as to the correct state of law embodied in section 40(b) came into the possession of the ITO from an external source and it was on the basis of the said information that the ITO had formed the belief as to the escapement of income; (iv) that the decision of the Income-tax Appellate Tribunal, Bombay Bench, on the question of law with regard to the true scope and effect of section 40(b) was rendered by an authority competent and authorised to pronounce upon the law ; (v) that, therefore, the ITO had acted on material which constituted information within the meaning of section 147(b) of the Act; and (vi) that this was, therefore, not a case of mere change of opinion by having a second look at the same facts. In this view of the matter, the appeals were dismissed. At the instance of the assessee, the Tribunal has referred the following questions of law to this court for its opinion : (1) Whether, on the facts and in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .J., as he then was, speaking for the court, observed (pp. 192, 193): Now, if information is as to any fact, it may be received from any person who knows the fact. The external source in case of information as to fact cannot be limited to any particular person, body or authority, since such fact may be within the knowledge or in the possession of anyone and it may be received by the Income-tax Officer from any source. But so far as information as to the correct state of the law is concerned, the external source from which it may be received must necessarily be of a limited character....If the opinion of any person as to the state of the law were to be regarded as ' information ' irrespective of the fact whether such person has competence or authority to pronounce upon the law, it would be easy to disguise mere change of opinion on the part of the Income-tax Officer under the cover of opinion of some other person...obviously such instruction or knowledge must be from a person, body or authority competent and authorised to give it. It must have an element of authority behind it. It cannot be mere opinion of some one who has no authority to pronounce upon the law...It mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f all the decisions rendered up to the date of that decision, observed that the view which finally prevailed as to the legal position governing the applicability of section 147(b) was as follows (p. 993): (1) that ' information ' means instructive knowledge concerning a matter bearing on the assessment received after the completion of the original assessment; (2) that the ' information ' may be as to the correct state of facts or of law relating to the taxable income ; (3) that such ' information ' must be capable of arousing or suggesting ideas or notions not before existent in the mind of the Income-tax Officer ; (4) that it must be of such a nature as to acquaint, enlighten or instruct the mind of the Income-tax Officer for the first time concerning a matter pertaining to the taxable income so that he could form a reasonable belief that there has been an escapement of assessment of tax which requires to be set right by taking steps for reopening, the assessment; (5) that mere change of opinion on the part of the Income-tax Officer would not be sufficient and it would not constitute ' information ; (6.) that ' informat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g parties. The declaration or exposition is ordinarily set forth in the judgment of a court or the order of a tribunal. Such declaration or exposition in itself bears the character of law. In every case, therefore, to be law, it must be a creation by a formal source, either legislative or judicial authority. A statement by a person or body not competent to create or define the law cannot be regarded as law In that view, therefore, when section 147(b) of the Income-tax Act is read as referring to ' information ' as to law, what is contemplated is information as to the law created by a formal source. It is law, we must remember, which, because it issues from a competent legislature or a competent judicial or quasi-judicial authority, influences the course of the assessment and decides any one or more of those matters which determine the assessee's tax liabilty. (underlining supplied.) The Supreme Court then considered the question as to whether an audit report of the internal audit organisation of the Income-tax Dept. or that of an audit party of the Comptroller and Auditor-General could pronounce on the law and whether such pronouncement, if any, would amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he audit note and whether in consequence of the law which has not come to his notice he can reasonably believe that income has escaped assessment. The basis of his belief must be the law of which he has now become aware. The opinion Tendered by the audit party in regard to the law cannot, for the purpose of such belief, add to or colour the significance of such law. In short, the true evaluation of the law in its bearing on the assessment must be made directly and solely by the ITO. The Supreme Court then pointed out that in the case before it the ITO had, when he made the original assessment, considered the provisions of sections 9 and 10 and any different view taken by him afterwards on the application of those provisions would amount to a change of opinion on material already considered by him. Therefore, such reappraisal of the material considered by him during the original assessment and the consequential discovery of an error as a result whereof income had escaped assessment, would not empower him to reopen the assessment. The Supreme Court, in this context, considered its earlier decision in Kalyanji Mavji Co. [1976] 102 ITR 287 (SC) and the second test laid down i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat part of the communication, which mentions the law and which has escaped the notice of the ITO at the time of the original assessment, would constitute information . It would not be open to the ITO, however, to reopen a completed assessment upon reappraisal of the material considered by him during the original assessment. An error discovered on a reappraisal of the same material, without anything more, does not give him the power to reopen the assessment. Now, in the instant case, the ITO, when he made the original assessment, considered the provisions of section 40(b) and on his own understanding of the said statutory provision, disallowed the claim for deduction of interest credited to the respective joint family accounts but he allowed interest credited to the individual accounts of the three partners as a permissible deduction. After the completion of the assessments, his attention was drawn to the decision of the Income-tax Appellate Tribunal, Bombay Bench, in the case of another assessee where, on an interpretation of the relevant statutory provision, the view was taken that so long as any amount was paid as and by way of interest to a partner, whatever may be the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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